You might go after the advisor.
Well, Claimant in the proceedings at hand chose another route: Claimant rescinded the Asset Purchase Agreement for unilateral mistake (Article 24(1)(4) of the Swiss Code of Obligations) and requested to be refunded those parts of the purchase price Claimant had already paid.
The facts of this case are straight forward. The parties had entered into an Asset Purchase Agreement regarding the sale of the assets of a car repair shop. Before signing the contract, the buyer had engaged an advisor to evaluate the business. The valuer had estimated a business value of between roughly CHF 100.000 and CHF 350.000. The buyer agreed to pay CHF 280.000.
However, as it turned out, the business valuation suffered from "serious methodological errors", rendering it "incomprehensible" and "in material respects generally wrong". These were the statements of the court-appointed expert who had estimated a business value of between CHF 0 and roughly CHF 65.000.
The huge difference stemmed from the fact that the valuer had worked on a going-concern basis, whereas the expert assumed that the car repair business was ripe for liquidation.
Decision of the Supreme Court
The appeal was from the Commercial Court of Zurich, which had dismissed Claimant's arguments to allow the rescission of the Asset Purchase Agreement.
The Supreme Court reversed the Commercial Court's decision, allowed the Claimant to rescind the Asset Purchase Agreement and ordered restitution of those parts of the purchase price that had already been paid. In doing so, the Supreme Court considered that the buyer had entered into the Asset Purchase Agreement under a completely wrong assumption about the value of the business about to be purchased.
Such mistake was sufficiently fundamental, both judged subjectively from the buyer's perspective and objectively form the perspective of a reasonable businessperson, to fulfill the statutory requirements to allow rescission for unilateral mistake. Accordingly, the Supreme Court ordered the restitution of the parts of the purchase price Claimant had already paid.
It is a somewhat awkward feature of Swiss contract law to allow rescission for unilateral mistake even if the mistake was caused by the mistaken party's negligence (or, as here, the negligence of a third party whose conduct is attributable to the mistaken party). Nevertheless, this position undoubtedly represents good law in Switzerland. It follows from the wording of Article 26(1) of the Swiss Code of Obligations, which – while imposing liability on the mistaken party – preserves the mistaken party’s right to rescind even if the mistake is the result of its negligence.
Swiss case law has only limited the right to rescind where allowing rescission would be contrary to the principle of good faith. Yet, this limitation could not be engaged in the present case as the buyer had honestly believed in the valuation made on its behalf. No bad faith conduct could be established.
Consequently, the non-mistaken (and innocent) party will solely have recourse to a damage claim based on Article 26(1) and (2). The damages are normally assessed such that they restore the non-mistaken party to the financial position that had existed before the contract was made. The non-mistaken party may therefore claim reimbursement of wasted expenditure (e.g., for contract negotiation).
Under Article 26(2), the court or arbitral tribunal has also discretion to award further damages, which put the non-mistaken party in the position it would have been if the contract had been properly performed. However, it is difficult to predict how the court or arbitral tribunal would exercise such discretion in practice.
Taking a more balanced approach to negligent mistakes would be highly preferable. In doing so, the Swiss legislator could follow the example of transnational contract law principles:
- Article 3.2.2 of the 2016 UNIDROIT Principles limit the mistaken party’s right to rescind where (i) it has been grossly negligent in committing the mistake, or (ii) the mistake relates to a matter that having regard to the circumstances should be borne by the mistaken party.
- Similarly, Article 4:103 of the Principles of European Contract Law (PECL) exclude the right to rescind where (i) the circumstances are such that make the mistake inexcusable, or (ii) the risk of mistake should under the circumstances be borne by the mistaken party.
These rules provide for a more nuanced approach that considers the mistaken party’s fault in committing the mistake as well as the commercial background of the deal in question.
Consequences for Contract Drafting
In the absence of intervention by the Swiss legislator (which seems unlikely), the pressing question lies in whether the parties can limit or exclude the right to rescind for unilateral mistake in their agreement.
In fact, Swiss case law has accepted that a warranty disclaimer, even if it does not mention mistakes, operates as to exclude rescission for unilateral mistake if the mistake relates to a matter that but for the disclaimer would be covered by the warranty. The reason for this is simple: If the parties intended to exclude warranty remedies, they most likely wanted to exclude rescission for unilateral mistake as well.
The same principle should apply where parties to an M&A agreement have submitted themselves to a sophisticated remedial framework consisting of condition precedent, warranty and indemnification provisions. Such contractual framework should normally operate as to exclude rescission for unilateral mistake. However, a well-drafted M&A agreement will explicitly spell out such intention. Here, it is unfortunate for the seller of the car repair shop that the Asset Purchase Agreement did not address this issue.
Considering contracting practice in general, it is always worthwhile to think about whether your agreement should limit or exclude the right to rescind for unilateral mistake, especially if the mistake was the consequence of the mistaken party’s negligence. Today, such limitations and exclusions are not a common occurrence in contracts governed by Swiss law. However, they would fit easily into a well-drafted non-reliance clause.
If you have any question about this case or need M&A or general contracting advice, please let us know. We regularly assist our customers in these matters.